Technical Market Report for July 23, 2011

The good news is: • The NASDAQ 100 (NDX) closed at a multi year high on Friday.

The negatives

Bear market rallies are often spectacular events. Not orderly moves of two steps up and one step down, but moon shots that appear to come out of nowhere.

The chart below illustrates the prevailing patterns of the breadth indicators. It covers the past 6 months showing the NDX in red and a 10% trend (19 day EMA) of new highs, calculated over the past 15 trading days, of the component issues of the NDX (NH) in green. Dashed vertical lines have been drawn on the 1st trading day of each month.

Last week the NDX rose 3.09% to a multi year high while NH barely arrested its decline. While the NDX closed at a new high on Friday, only 16% of its component issues closed at short term new highs.

Everything is coming into place for a top. The blue chips are outperforming the secondaries and the breadth indicators are lagging.

The positives

New lows approached threatening levels and outnumbered new highs on Monday, but retreated to more comfortable levels as the week passed.

The chart below covers the past 6 months showing the NASDAQ composite (OTC) in blue and a 40% trend (4 day EMA) of NASDAQ new highs divided by (new highs + new lows) (OTC HL Ratio) in red. Dashed horizontal lines have been drawn at 10% levels for the indicator; the line is solid at the neutral, 50% level.

OTC HL Ratio rose to a fairly comfortable 71% on Friday.

The next chart is similar to the one above except it shows the SPX in red and NY HL Ratio, in black, has been calculated from NYSE data.

NY HL Ratio rose to 78% on Friday.

Seasonality

Next week includes the last 5 trading days of July during the 3rd year of the Presidential Cycle.

The tables below show the return on a percentage basis for the 5 trading days of July during the 3rd year of the Presidential Cycle. OTC data covers the period from 1963 - 2010 and SPX data covers the period from 1928 - 2010. There are summaries for both the 3rd year of the Presidential Cycle and all years combined.

Average returns have been negligible over all periods, but there have been some pretty spectacular draw downs.

Last 5 days of July. The number following the year represents its position in the presidential cycle. The number following the daily return represents the day of the week; 1 = Monday, 2 = Tuesday etc.

OTC Presidential Year 3

Day5

Day4

Day3

Day2

Day1

Totals

1963-3

0.99% 4

-0.36% 5

-0.36% 1

0.18% 2

0.90% 3

1.35%

1967-3

-0.33% 2

-0.06% 3

0.37% 4

0.76% 5

0.09% 1

0.83%

1971-3

-0.26% 1

-0.71% 2

-1.03% 3

-1.53% 4

-0.51% 5

-4.04%

1975-3

-0.64% 5

-0.61% 1

-0.51% 2

0.44% 3

0.19% 4

-1.13%

1979-3

0.69% 3

0.40% 4

0.36% 5

0.37% 1

0.56% 2

2.38%

1983-3

0.04% 1

-0.15% 2

1.50% 3

-2.09% 4

-1.54% 5

-2.24%

1987-3

-0.06% 1

0.26% 2

0.29% 3

0.55% 4

0.31% 5

1.35%

Avg

-0.05%

-0.16%

0.12%

-0.45%

-0.20%

-0.74%

1991-3

0.59% 4

0.49% 5

0.13% 1

1.00% 2

0.76% 3

2.97%

1995-3

1.55% 2

0.65% 3

1.05% 4

-0.53% 5

-0.41% 1

2.31%

1999-3

-2.72% 1

2.31% 2

0.97% 3

-2.43% 4

-0.06% 5

-1.92%

2003-3

1.72% 5

0.27% 1

-0.23% 2

-0.60% 3

0.82% 4

1.98%

2007-3

0.31% 3

-1.84% 4

-1.43% 5

0.82% 1

-1.43% 2

-3.57%

Avg

0.29%

0.37%

0.10%

-0.35%

-0.06%

0.35%

OTC summary for Presidential Year 3 1963 - 2007

Averages

0.16%

0.05%

0.09%

-0.26%

-0.03%

0.02%

% Winners

58%

50%

58%

58%

58%

58%

MDD 7/30/1971 3.98% -- 7/31/2007 3.85% -- 7/29/1983 3.60%

OTC summary for all years 1963 - 2010

Averages

0.05%

-0.01%

-0.11%

-0.01%

0.00%

-0.09%

% Winners

56%

46%

46%

60%

52%

58%

MDD 7/28/2000 9.10% -- 7/31/1974 6.22% -- 7/31/1969 4.97%

SPX Presidential Year 3

Day5

Day4

Day3

Day2

Day1

Totals

1931-3

0.79% 1

1.07% 2

-3.10% 3

0.44% 4

-0.51% 5

-1.31%

1935-3

0.56% 5

1.20% 6

1.10% 1

-0.91% 2

1.28% 3

3.24%

1939-3

1.00% 3

0.08% 4

-0.33% 5

-0.25% 6

-0.58% 1

-0.08%

1943-3

-3.17% 2

-0.34% 3

1.68% 4

-1.90% 5

-1.43% 6

-5.16%

1947-3

-0.25% 5

-0.87% 1

-2.20% 2

-0.45% 3

1.55% 4

-2.22%

Avg

-0.21%

0.23%

-0.57%

-0.61%

0.06%

-1.11%

1951-3

-0.53% 3

0.67% 4

0.27% 5

0.44% 1

-1.02% 2

-0.17%

1955-3

1.12% 1

0.23% 2

0.41% 3

-0.59% 4

0.05% 5

1.21%

1959-3

0.62% 1

0.50% 2

0.50% 3

-0.20% 4

0.02% 5

1.44%

1963-3

-0.03% 4

0.41% 5

0.19% 1

0.83% 2

-0.16% 3

1.24%

1967-3

0.01% 2

0.34% 3

0.31% 4

0.15% 5

0.28% 1

1.08%

Avg

0.24%

0.43%

0.34%

0.13%

-0.17%

0.96%

1971-3

-0.27% 1

-0.90% 2

-0.73% 3

-1.08% 4

-0.46% 5

-3.44%

1975-3

-0.87% 5

-0.67% 1

-0.56% 2

0.73% 3

-0.09% 4

-1.47%

1979-3

1.09% 3

0.02% 4

0.00% 5

0.05% 1

0.64% 2

1.80%

1983-3

0.38% 1

0.48% 2

-1.62% 3

-1.52% 4

-1.50% 5

-3.78%

1987-3

0.45% 1

0.54% 2

1.06% 3

0.76% 4

0.19% 5

3.00%

Avg

0.15%

-0.11%

-0.37%

-0.21%

-0.24%

-0.78%

1991-3

0.61% 4

-0.01% 5

0.58% 1

0.92% 2

0.29% 3

2.40%

1995-3

0.80% 2

0.09% 3

0.64% 4

-0.41% 5

-0.15% 1

0.98%

1999-3

-0.68% 1

1.12% 2

0.18% 3

-1.79% 4

-0.92% 5

-2.08%

2003-3

1.74% 5

-0.22% 1

-0.73% 2

-0.18% 3

0.29% 4

0.90%

2007-3

0.47% 3

-2.33% 4

-1.60% 5

1.03% 1

-1.26% 2

-3.71%

Avg

0.59%

-0.27%

-0.18%

-0.09%

-0.35%

-0.30%

SPX summary for Presidential Year 3 1931 - 2007

Averages

0.19%

0.07%

-0.20%

-0.20%

-0.18%

-0.31%

% Winners

65%

65%

55%

45%

45%

50%

MDD 7/31/1943 5.12% -- 7/29/1983 4.57% -- 7/31/2007 4.14%

SPX summary for all years 1928 - 2010

Averages

-0.03%

0.01%

0.10%

0.16%

0.09%

0.31%

% Winners

57%

56%

53%

63%

63%

58%

MDD 7/26/1934 7.83% -- 7/31/1933 6.84% -- 7/31/1974 6.68%

Money supply (M2)

The money supply chart was provided by Gordon Harms. The explosive growth of M2 continued last week, perhaps it is everyone bailing out of treasuries and other bonds.

Conclusion

The sharp rally in prices did little to move the breadth indicators. The pattern is consistent with a developing top.

I expect the major averages to be lower on Friday July 29 that they were on Friday July 22.

Last weeks negative forecast was a miss.

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In his latest newsletter, Jerry Minton looks at "The Dead Zone”, calendar periods that claim 80% of the markets declines. You can sign up for his free newsletter at: http://alphaim.net.

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